Transparency

In a world in which Google’s reorganizing itself to boost transparency into its main business, I thought it would be a good week to talk about transparency.

I’m a big fan of a transparency. A former boss, now chief operating officer of Morgan Stanley’s technology division, used to remind me that sunlight is the best antiseptic.

He used the term referring to dashboards on financials, projects and risk – but I’m using in a context of being transparent with your customers about your value and pricing.

In my experience, banks, are less transparent than startups. I think a reason is that banks have a lot of different constituents – and less of a singular value proposition – but startups and banks can fall short.

Consider Lending Club. A former employee told someone it saves the average borrower only 1.5% after factoring in all its fees.

It’s still decent savings, yet the company plays up the gap between savings account rates (<1%) and credit card rates, as if it were passing along savings of that magnitude.

(This issue isn’t limited to Lending Club. As reported by Bloomberg, a disclosure by Citi on securities from Prosper gave a forecast return of 5.48% on low risk loans; total losses were forecast at 8%; 13.2% average APR)

Lending Club and its peers are great models, but I think they could be more transparent. I’m optimistic about marketplace lending. But to help make it better, I encourage everyone to provide feedback to the U.S. Treasury’s RFI on this sector. Comments are due on Sept. 3rd.

I just read Morgan Stanley’s Smittipon Srethapramote set a target of $24 for Lending Club (60% above from its current price).

I’ve not spoken to Smittipon since the IPO, but read he was bullish given acquisition cost trends and growth ‘runway’: I was glad given my upbeat take on Lending Club in TheStreet.com.

Another topic I’ve been thinking about lately is this chart:

Created by the Financial Brand team, including FinTech Mafia member, Jim Marous, it was well worth sharing. It does speak to both how banks may have their heads in the sand, and also the marketing work that remains to be done at some startups.

As an advisor to startups, I’ve seen how difficult it is to break out into even the level of awareness of firms in the table, despite the increase in venture funding for FinTech.

I’d like to mention a startup, LoanNow, which is early stage and seeking to break out. I recently spoke with Miron Lulic, President of LoanNow, a ‘white hat’ (or responsible) online lender.

Similar to LendUp, key differences with LoanNow is it offers installment loans vs. revolving credit, and provides higher loan amounts. I admire Lulic’s goal to make lending better via technology, which he observed was pretty appalling in the payday lending industry.

LoanNow wants to bring better technology and an improved user experience (UX) to an antiquated, category of lenders that they also believe charges its borrowers too much.

We Help Good People Get Better Loans

LoanNow offers ‘gamification’ (e.g. challenges to meet in order to lower the APR), but one innovation unveiled at Finovate was ‘group signing’, or micro co-signing by your friends, to lower your interest rate (similar to Vouch).

LoanNow has the potential to succeed since it’s motivated to do the right thing for its clients, and is laser-focused on its target customers.

It’s a tough market for startups without backers from the biggest names, but I wish them well – and think they’ll be successful.

Several VC’s are staying clear of online lending (seeing it is ‘too hot’ as Emergence Capital told me, or in conflict with prior investments, as First Round Capital and CrossLink Capital indicated).

But it’s good to see Andreessen Horowitz is embracing FinTech with its recent appointment of Alex Rampell, former CEO of Trial Pay, as a new partner focus on opportunities in FinTech.

Still, some startups may have to bypass VC’s and emulate Patch of Land, that grew with the help of several accredited investors and a credit line, before gaining larger investors.

Embrace transparency

Here are my two closing suggestions for other early-stage firms in the online lending space.

Be true to audience and brand. If you’re targeting the lower end of the market, i.e. payday loans, don’t use a web design firm to make your site look like you’re Stripe (targeting developers) or LendingClub (targeting prime borrowers). Be yourself – don’t try to be like someone else.

Embrace transparency. Be very upfront about your value vs. other options that exist, i.e. don’t knock the banks as being ‘not lending’ since 2008 or ‘ignoring the SMB market’ when recent published figures don’t support this. Tell the truth, and you’ll win with customers.

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One thought on “Transparency”

That thing about sunlight is actually a very famous quote from Supreme Court Justice Louis Brandeis, who said that “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman”. I agree with you strongly about embracing transparency: this might be one of the determining characteristics of the next generation of financial services.